Chart of the week: Sell a miner, buy a bank

Rio Tinto finally runs into resistance

Early this year I turned bullish on metals and the big miners such as BHP Billiton and Rio Tinto. That stance was based on the overwhelmingly bearish sentiment that had built up over years of falling commodity prices and mounting stockpiles, as well as the wave patterns that pointed to a rally phase ahead.

I show this on the updated monthly chart. From the high in 2011, the decline formed a large A wave (of an eventual A-B-C three down), followed by a complex B wave that has the appearance of a wedge and when new lows were forming in 2015/2016 in the final C wave, I started looking for a major turn.

That I found in February and March. And, since then, the market has staged an impressive rally, but not many have believed it! Stockpiles of metals and ores still remain high, while China is slowing. There has been intense competition in steel prices also.

So, on purely fundamental grounds, these huge metal and ore rallies make no sense, do they?

For example, here is iron ore, a major product mined by the company:

From the low of 300 to the recent doubling to the 600 high is a massive shock to the vast majority of analysts who believe it is the data and the fundamentals that drive markets.

This is so manifestly untrue - but that little "problem" still will not cause them to question their beliefs.

They will find all kind of rationalisation, such as blaming those pesky "speculators", or upcoming mine shut-downs, or even the phase of the moon (if totally desperate).

But that little slice of human nature is what gives me my great trades! Long may it continue.

I also have a "head and shoulders" reversal pattern and a measured target now lies much higher. More shocks ahead for conventional analysts?

So, with metals in the ascendant, Rio has naturally responded. Here is the daily chart of the rally off the winter low:

The rally is in the form of an A-B-C which is always corrective to the main trend. And wave C is a textbook "five up", which is normal for third waves (the C wave is a third wave).

Not only that, but the market has hit the Fibonacci 50% resistance level, as shown on the top chart.

For traders who bought last winter, this is a great place to seriously consider taking some major profits off the table.

Deutsche Bank rallies - against pundits' expectations (again)

I started covering this bombed-out share on 10 October just after the major low, when I believed I had identified that low, and expected a decent rally phase would get underway.

This was truly a "buy low, sell high" candidate. This was the weekly chart I showed then:

I noted the huge momentum divergence building (bullish) and also the huge spike in trading volume in late September. That spike had all the hallmarks of a selling exhaustion (or selling climax), which is typical at major lows.

It is where the last of the tired, frustrated and totally disgusted longs throw in the towel because they cannot stand the pain any longer.

The news was universally bleak at the time, but who was doing the buying and taking the shares off their hands? Of course, it was the smart money! The downside potential was limited and who could say about the upside potential?

With limited downside risk, even a small rally would produce a large percentage gain. And so it has proved - here is the daily chart updated:

Here is the lovely Deutsche Bank wedge that heralded a strong rally phase back in October, when the market pushed up above the upper wedge line.

After that, it came back to plant a traditional kiss on the line and proceeded to resume the rally in a classic "scalded cat" bounce. This was textbook stuff.

So far, since the low on 30 September, the shares have gained 50% to the €15 area - and the smart money has done well for taking a well-judged moderate risk.

But now the market is pushing up into heavy overhead chart resistance and a pull-back is likely. But it appears the rally phase is not yet over. There are many more disbelieving bears still to be convinced.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.